Management s Discussion and Analysis of Financial Condition

196 2013 CAF ANNUAL REPORT Management s Discussion and Analysis of Financial Condition

CAF ANNUAL REPORT 2013 197 200 200 201 201 203 203 Summary of the financial statements Loan portfolio Liquid assets Funding Capital Asset Liability Management

198 2013 CAF ANNUAL REPORT MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION The improvements in CAF s credit ratings in 2013, added to those obtained in 2012, consolidated the Institution as a supra-national in the AA category. In 2013, the credit rating agencies Fitch Ratings and Japan Credit Rating Agency upgraded CAF s long term debt rating to AA- and AA, respectively, in recognition of the Institution s credit quality and financial strength. In addition, Moody s Investor Service and Standard & Poor s ratified their Aa3 and AA- ratings, respectively, maintaining a stable outlook, as seen in Table 1. The improvements in ratings achieved in 2013, added to those obtained during 2012, consolidated CAF as a supra-national in the AA category. These upgrades were based, among other factors, on the capital strengthening that was consolidated through the expansion of the shareholder base, the support of shareholder countries through repeated increases in subscribed and paid-in capital, and a greater diversification of the loan portfolio. In 2013, CAF reaffirmed its role as the main source of multilateral financing for its founding countries, and as an important provider of resources for its shareholder countries in Latin America and the Caribbean, by approving operations totaling USD 12.1 billion, and disbursing USD 7.4 billion, mainly aimed at financing medium and long-term projects.

CAF ANNUAL REPORT 2013 199 Table 1. CREDIT RATINGS Long-term Short-term Outlook Fitch Ratings AA- F1+ Stable Japan Credit Rating Agency AA - Stable Moody's Investors Service Aa3 P-1 Stable Standard & Poor's AA- A-1+ Stable During 2013, shareholder countries continued paying their subscribed capital contributions in a timely manner, for a total of USD 865 million. Also in 2013, net income reached USD 207 million, exceeding the amount registered in 2012, partly as a result of the adjustments to the methodology for calculating allowance for loan losses, which resulted in a one-off credit to the allowance. Operating earnings continued to be negatively affected by the reduction of the average LIBOR rate, which went from 0.69 percent in 2012 to 0.41 percent in 2013. As a result, the main profitability indicator, Return on Equity was 2.9 percent. With respect to bond issues in international markets, 2013 marked a record breaking year in regards to the number of transactions in CAF s history. The Institution completed 14 bond placements for approximately USD 2.7 billion. In addition, CAF continued diversifying its investor base, issuing in America, Europe, Asia, and Oceania. Graph 1. Balance Sheet as of December 31 of each Year (in USD million) assets 3,685 11,687 2009 Liquidity 4,127 13,783 2010 Loan Portfolio liabilities and equity 5,656 14,981 2011 7,186 16,355 2012 8,305 18,003 2013 Other Assets Regarding short-term borrowing, deposits received represented the main source of funding, with a year-end closing balance of USD 3.3 billion. Commercial papers in the US and European markets constituted another important source of resources, with a total balance of USD 2.9 billion. 10,600 5,287 12,794 5,753 15,184 6,351 17,739 6,865 19,602 7,817 2009 2010 2011 2012 2013 Liabilities Equity

200 2013 CAF ANNUAL REPORT Graph 2. Net Earnings and Profitability for the Period Ending on December 31st of each Year Net earnings (USD million) Profitability indicators 4.7 % 235 207 3.0 % 2.5 % 2.5 % 2.9 % 166 153 160 1.2 % 1.6 % 1.0 % 0.8 % 0.5 % 0.5 % 0.7 % 0.7 % 0.8 % 0.4 % 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 ROE ROA 6-Month LIBOR Summary of financial statements During 2013, CAF s total assets reached USD 27.4 billion, representing an increase of 11 percent with respect to the previous year (Graph 1). This rise was not only due to an increase in the loan portfolio -which closed at USD 18.0 billion, exceeding the previous year by 10 percent-, but also to a growth in liquidity, which totaled USD 8.3 billion, 16 percent higher than 2012, and equivalent to 30.3 percent of total assets and 43.7 percent of total indebtedness. As of December 31st of 2013, CAF s net worth reached USD 7.8 billion, with a paid-in capital of USD 3.9 billion, additional paid-in capital of USD 1.3 billion, and USD 2.5 billion between reserves and retained earnings. At year-end 2013, net worth represented 28.5 percent of total assets and 39.3 percent of risk-weighted assets, according to the methodology established in the Basel Agreement. Net interest income in 2013 was reduced by 2.3 percent due to the declining trend of the LIBOR rate during most of the year. It should be noted that LIBOR rate is the principal benchmark for setting interest rates for CAF s assets and liabilities and, given the high capitalization of the Institution, there is a positive correlation between net income and the movements of this rate. Net income and ROE remained in line with the established benchmarks. Net income reached USD 207 million in 2013, and ROE was 2.9 percent, while the average yield of the ten-year US Treasury bonds reached 2.4 percent and the average six-month LIBOR rate was 0.41 percent (Graph 2). The Return on Assets (ROA) for the year was 0.8 percent. It should be noted that these indicators were affected by the change in the methodology for calculating the allowance for loan losses, which resulted in an increase of earnings due to a one-off credit to the allowance. Loan portfolio At the end of 2013, the total loan portfolio was USD 18.0 billion, which represented an increase of 10 percent with respect to the USD 16.4 billion of the previous year. Loan portfolio distribution continued to be largely concentrated in public sector projects, representing 83.2 percent of the total portfolio as of December 31st, 2013. Looking at the distribution of the portfolio by countries, Venezuela had the largest exposure, with 16.5 percent of the total, followed by Ecuador with 15.2 percent, Peru with 13.8 percent, Argentina with 13.7 percent, Colombia with 10.0 percent, Bolivia with 9.7 percent, Brazil with 9.2 percent, Panama with 4.9 percent, and Uruguay with 2.1 percent. The increasing participation of the new full-member shareholders contributes to the diversification of the the loan portfolio. In this respect, the new full-members represented 30.9 percent of the loan portfolio at year-end 2013. The main activities financed by CAF at the end of 2013 are transportation infrastructure projects which represented 34.4 percent of the

CAF ANNUAL REPORT 2013 201 loan portfolio, energy projects with 28.1 percent, social services and health projects with 10.5 percent, and commercial banking with 7.7 percent, among others. In addition, the loan portfolio maintained its excellent credit quality (Table 2). At year-end 2013, there were no loans in non-accrual status and provisions for loan loss totaled USD 38 million, representing 0.2 percent of the loan portfolio. During 2013, a single loan for USD 4.1 million was written-off. The loan portfolio totaled USD 18.0 billion at the end of 2013, which represents an increase of 10 percent with respect to the 16.4 billion registered the previous year. Table 2. PORTFOLIO QUALITY (IN USD MILLION) 2009 2010 2011 2012 2013 Overdue loans 0.0 0.0 0.0 0.0 0.0 Non-accrual Loans 0.0 0.0 8.2 7.9 0.0 Allowance for Loan Losses 143.9 141.4 130.0 125.8 38.0 Overdue as a Percentage of Loan Portfolio 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Non-accrual Loans as a Percentage of Loan Portfolio 0.00 % 0.00 % 0.05 % 0.05 % 0.00 % Loan Loss Provisions as a Percentage of Loan Portfolio 1.23 % 1.03 % 0.87 % 0.77 % 0.21 % Liquid assets Graph 3. Liquid Assets as of December 31, 2013 As of December 2013, liquid assets totaled USD 8.3 billion, equivalent to 30.3 percent of total assets and 43.7 percent of the Institution s total indebtedness. The investment portfolio was characterized by its short duration, which averaged 0.48 years, and its excellent credit quality (Graph 3). 96.4 percent of this portfolio was rated A-/A3 or above, with an average rating of AA/Aa2, and only 3.6 percent was rated below A-/A3. CAF s policies require that at least 90 percent of the liquid assets be held in instruments with investment grade, and with credit ratings of at least A-/A3. Investment grade (AA Average credit rating) 3.6 % 96.4 % Non-investment grade Funding At year-end 2013, total financial liabilities were USD 19.0 billion, while total liabilities reached USD 19.6 billion. 2013 was a very active year for CAF in the international bond markets. The Institution completed 14 bond placements for an approximate amount of USD 2.7 billion. To date, this amount represents the largest number of transactions conducted in a single year. In addition, CAF continued diversifying its geographic distribution, issuing in America, Europe, Asia, and Oceania. CAF made its debut in the exclusive Australian market with 2 issues with three and ten year maturity for AUD 350 million and AUF 225 million, respectively, becoming the first Latin American issuer to access this prestigious market and its investor base. The Institution returned to the Swiss market with three bond issues for a total of CHF 600 million (approximately USD 644 million) to consolidate its curve in Swiss Francs, reaffirming itself as the most frequent Latin American issuer in that market. At the same time, CAF once again tapped into the German Schuldschein market with a 20-year issue for EUR 200 million (USD 265 million),

202 2013 CAF ANNUAL REPORT consolidating its presence in this market. Finally, several placements were made in different currencies such as USD, Euros, Yens, and Hong Kong Dollars, aimed at investors that represent a great strategic value for CAF. With respect to short-term borrowings, CAF has maintained its presence in the commercial papers markets both in the United States and Europe. It should be noted that borrowing spreads have remained at competitive levels, and the Commercial Papers program in Europe increased from USD 2 billion to USD 3 billion to accommodate a larger demand. sectors, of which USD 200 million were contracted with KfW and USD 30 million with the Swedish Export Credit Corporation (SEK). In addition, total disbursements reached USD 316 million, corresponding to current facilities with JBIC, KfW, NIB and SEK. The loan program in local currencies for microfinance institutions continued, specifically in Bolivia, Mexico, and Peru. Additionally, USD 51 million were obtained through loan portfolio sales. Graph 4. Composition of Financial Liabilities as of December 31st, 2013. In 2013, deposits received represented the most important source of short-term funding, reaching an amount exceeding USD 3.3 billion at the end of the year. Thus, these instruments have maintained their importance as a stable and competitive source of funding. With respect to medium- and long-term loans from development financial institutions from developed countries, international agencies, and multilateral banks, new credit facilities have been negotiated for USD 230 million to support the financing of projects in the transportation and trade financing Loans and other liabilities 9 % 15 % 17 % 59 % Bonds Commercial papers Term deposits Table 3. BOND ISSUES IN 2013 DATE MARKET AMOUNT IN ORIGINAL CURRENCY (IN MILLIONS) EQUIVALENT IN MILLIONS OF USD BOND ISSUES February Euro EUR 100 135 February Swiss CHF 250 272 February Yankee USD 100 100 April Swiss CHF 100 107 May Euro EUR 100 129 July Hong Kong HKD 940 121 August Swiss CHF 250 265 August Japan USD 100 100 August Japan JPY 4.600 47 August Euro EUR 200 265 August Australia AUD 350 314 September Euro EUR 51 68 October Yankee USD 200 200 November Kangaroo AUD 225 213 December Euro EUR 251 341 Sub-total 2013 2,677 Total 1993-2013 19,265 SHORT-TERM ISSUANCE PROGRAMS Commercial papers (USA) USD 2,000 2,000 Commercial papers (Europe) USD 3,000 3,000

CAF ANNUAL REPORT 2013 203 As of December 31st, 2013, 74 percent of CAF s funding came from international capital markets. Bond issues represented the main source, with 59 percent of total funding (Graph 4). Deposits received from institutional investors in the region represented 17 percent, followed by commercial papers, with 15 percent, and other medium- and long-term loans and credit lines, which represented 9 percent. Details of bonds issued in 2013 can be seen in Table 3. Capital During 2013, CAF received USD 865 million in new capital contributions from its shareholder countries. Most of these contributions came from payments from the capital increases approved in 2009 and 2011, for a total of USD 2.5 billion, and USD 2 billion, respectively. The remaining contributions corresponded to the remaining payments of the capital increases subscribed since 2007 by countries that have become full members. It should be noted that during 2013, Trinidad and Tobago paid its second installment of USD 108 million to become a full member. At the end of 2013, the Institution s net worth reached USD 7.8 billion, 14 percent over the amount registered at the end of the previous year, strengthened by the capital contributions made by the shareholder countries and by retained earnings. Favored by the increase in shareholders equity, the capitalization ratios remained above the levels established by the Institution s internal policies (Table 4). Table 4. CAPITALIZATION RATIOS 2009 2010 2011 2012 2013 Loan Portfolio/Net Worth (times)¹ 2.3 2.5 2.4 2.4 2.4 Debt/Net worth (times)² 2.0 2.2 2.3 2.5 2.4 Net Worth/Risk-weighted Assets (BIS)³ 41.7% 37.2% 38.7% 40.2% 39.3% 1 According to CAF s Establishing Agreement, the exposure ratio must be less than or equal to 4.0. 2 According to CAF s Establishing Agreement, the ratio of indebtedness must be less than or equal to 3.5. 3 According to the CAF s Board of Directors policy, the capitalization level calculated in accordance with the Basel methodology, must be greater than or equal to 30%. Asset Liability Management In order to mitigate foreign exchange and interest rate risks, CAF s lending and borrowing activities are primarily conducted in floating rate U.S. Dollars. As of December 31st, 2013, 99.8 percent of assets and 99.7 percent of liabilities were denominated in U.S. Dollars after swaps, while 99.4 percent of the loans and 97.2 percent of the financial liabilities were based on the LIBOR rate after swaps. Transactions that are not denominated in US Dollars and based on the 6-month LIBOR rate are converted through swaps to those terms. The swaps book reached USD 11 billion at year-end 2013. CAF s policies establish that swap counterparties must be rated at least A/A2, or have a collateral agreement. Thus, CAF establishes Collateral Agreements (CSA) with its derivatives counterparts, reducing the credit risk, since valuations are made on a market-to-market basis and the debtor party must place the corresponding collateral within certain predetermined parameters. CAF does not trade derivatives on its own account. These instruments are used solely for hedging purposes. CAF seeks to maintain a conservative relationship between the average term of its assets and liabilities. As of December 31st, 2013, the average life of its assets was 4.3 years, and that of its liabilities was 4.5 years. The latter value does not include the portion corresponding to capital, which constitutes a high percentage of CAF s funding, and favors the maturity profile of liabilities.